This new technology presents a challenge but the problem of insider trading is hardly new. The regulator must rise to this new challenge if it is to maintain its reputation for efficiency.

The Securities and Exchange Board of India will investigate possible leaks of company earnings in social media chatrooms after a Reuters investigation documented at least 12 cases of prescient messages about major Indian companies being posted in private WhatsApp groups. This author explains why SEBI should try to create means of observing this medium and others like it.

A recent Reuters news report identifies a dozen messages that accurately predicted Q2 earnings patterns (and a bonus announcement in one case) for specific listed stocks. In each case, the messages were being passed around, just before the results were officially announced. These messages were being circulated in private Whatsapp groups frequented by equity traders. These were all big companies – in fact, more than half of the stock concerned are members of the Nifty-50.

WhatsApp, an instant messaging service owned by Facebook, is a popular platform for all sorts of sensitive communications. It is encrypted end-to-end, making it impossible for even the service provider to monitor content.

There are many private groups of equity traders on the Whatsapp platform and the circulation of messages claiming to have credible “khabar” seems to be quite common. Such messages are often wildly inaccurate, and sometimes they are just rehashes of known consensus estimates. But in the cases mentioned in this report, the messages were extremely accurate and much closer to the reality of the results than the consensus estimates.

Even in such cases, it is unclear if the messages consist of genuine inside information or merely of accurate guesses based on public information. Dissemination of the former would be illegal under India’s insider trading laws, even if nobody traded upon the information.

Assuming that such a message is being circulated, finding the origin of the message is technically possible because the Whatsapp service has a time-stamp and the service provider could trace the phone number from where the message initially originated. In addition, SEBI has the power to call up transaction records from the exchanges and to check if there has been unusual trading patterns in a given stock at the critical period to tie any such trading patterns to any messages.

Given the accuracy of some of the messages cited by the report, the regulator, SEBI, should definitely take cognisance of the situation and carry out an investigation. If it does discover that any of these messages originated from insiders, SEBI has the power to hand out prison sentences, or fines, or both.

More broadly, SEBI should try to create means of observing this medium and others like it. While Whatsapp is the most popular of the encrypted instant message platforms, there are several others like it. Other market regulators such as America’s SEC also have to deal with the issue of price-sensitive information being passed through such mediums.

It is not easy given the end-to-end encryption but it is possible for example, to set up specialised units to track and monitor such a medium. It is also possible for SEBI to set up an email id, for example, where such messages can be anonymously forwarded for analysis. That would give the regulator some idea about the scale of the problem and an opportunity to judge which messages are credible and actionable and worth following up.

This new technology presents a challenge but the problem of insider trading is hardly new. The regulator must rise to this new challenge if it is to maintain its reputation for efficiency.